Prescriptive regulations may have gone too far says OSC Chair

The head of the Ontario Securities Commission (OSC) said she believes prescriptive regulations may have gone too far and would like to see the industry return to a more principles-based scenario.

Maureen Jensen, chair and CEO of the OSC, told a conference on financial advice in Toronto in March that the main role of regulators is to protect investors on an ongoing basis and to ensure fair and efficient markets.

Jensen said there was a huge exodus of investors from the market in the United States after the 2008 financial meltdown because they didn’t trust their advisors any longer – a situation she doesn’t want to see played out here.

“The issue is that I think that we’ve gone too far on prescriptive rules – that’s my personal view – and I think it would be much better if we got back to a more principles approach so that there wasn’t as much burden on compliance.”

The flip side is that no one wants to take greater risks and with prescriptive rules those in the industry know exactly what decisions to make to be compliant, she said.

Principles-based approach

Jensen acknowledged however, that while the principles-based approach is ideal, it only lasts until something goes wrong and then there is a hue and cry for stricter rules.

In answer to a question, she said it would be perfect if markets took the lead on introducing some regulatory reforms, but noted that positive changes must come from regulators in order for there to be a level playing field.

Many rules for advisors were written in the 1960s and 1970s but with the growth of technology and changes in investor behaviour, rules need to be updated and covered in regulatory business models, she said.

While some in the industry may fear the advance of robo advisors, Jensen said she does not believe they will replace people, but rather help them make their jobs more efficient as well as be particularly helpful for small investors.

Jensen said many Canadians put much of their trust in their financial advisors as the number of company benefit pension plans dwindle and investors are told not to rely on government to fund their retirements. That leaves investors in the hands of advisors, adding that good advice is “the cornerstone of what Canadians need to have a good retirement.”

Best interest standard

She said the industry is the midst of some major changes, including the potential for removing embedded commissions in mutual funds and the possibility of a best interest standard.

One of the biggest issues in the mutual fund industry right now is pressure on fees, a state that should continue for a few years, said Paul Bourque, president and CEO of The Investment Funds Institute of Canada (IFIC).

Bourque said CRM2 is providing more transparency to clients with regard to fees, a number he said should grow as time goes on.

He also predicted a greater move to passive products, an increase in technology, including robo advice, as well as ongoing regulatory reform.

That regulatory reform in the financial services industry has been incessant since 1995 when Glorianne Stromberg released her report calling for far-reaching changes to the mutual fund industry, said Ian Russell, president and CEO of the Investment Industry Association of Canada (IIAC).

Since then there has been an explosion of services and products. Most recently, regulators have brought in CRM2 as well as proposals to unbundle embedded commissions, said Russell.

In the near future, “the industry will respond…with a proliferation of more cost-effective products as clients demand further reductions in fees and charges. We’ll see more reliance on passive mutual funds, smart beta products and a reliance on ETFs and we’ll probably see a change in business models coming as a result of that as well.”

Shakeouts and consolidation

Many advisors will consolidate their books to become more productive, he predicted. He suggested there will be further shakeouts and consolidation in the industry over the coming years, a situation he said that will be exacerbated by further policy moves on the unbundling of fees.

“I think the outlook is for an efficient and effective market place but it will be a market place that is characterized by more consolidation in tandem with greater efficiencies of larger firms.”

Regulators have often struggled to adapt to changes with new rules, said Andrew Kriegler, president and CEO of the Investment Industry Regulatory Organization of Canada (IIROC).

Issues such as technology and the way different investors respond to changes are “challenging” for regulators in an era when financial advice is moving in new and different ways, said Kriegler.

Regulators need to move faster to keep up with client demands for more control over their investments. Many of those investors may see online products and services as just another form of financial advice.

“If your model portfolio is telling you to buy stock X, stock Y, stock Z, and that bond over there, that starts to look an awful lot like advice,” he said.

Online tools may be difficult for some to interpret while regulators are still using traditional KYC and suitability obligations that assume a long-term relationship, said Kriegler.

“We have to acknowledge that disclosure is not a panacea,” Kriegler said. “Disclosure does not get you out of an irreconcilable conflict of interest.”

He said IIROC is undertaking more research in this area in hopes of making regulation more proportional to the service being offered.

Kriegler said he believed the quality of advice will increase as time goes on both because the marketplace will demand it as proficiency levels increase.